Muriti v Prendergast

Supreme Court Rules LEGISLATION CITED : Civil Procedure Act 2005

Taylor v Johnson (1983) 151 CLR 422 Tutt v Doyle (1997) 42 NSWLR 10 CASES CITED : Medsara Pty Limited v Sande [2005] NSWCA 40 Mohamed v Farah [2004] NSWSC 482

Vincent Carl Muriti (first plaintiff) Keanlong Pty Limited (second plaintiff) PARTIES : John Francis Prendergast (first defendant) Rolcross Pty Limited (second defendant) Worthbrook Pty Limited (third defendant)

Mr J Stevenson SC and Mr G Curtin and Ms Bearup (plaintiffs) COUNSEL : Mr Prendergast in person and (by leave) for the other defendants

• 13 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4395/05 VINCENT CARL MURITI AND KEANLONG PTY LIMITED V JOHN FRANCIS PRENDERGAST, ROLCROSS PTY LIMITED AND WORTHBROOK PTY LIMITED JUDGMENT 1 This matter represents a further skirmish in a series of proceedings in the Court over the past year between Messrs Muriti and Prendergast, and companies controlled by them respectively, in relation to an agreement (known as the Heads of Agreement) concerning the division of the interests of Messrs Muriti and Prendergast in a Mercedes Benz dealership, a motor vehicle repair workshop and various parcels of real estate. The present dispute is a side issue, although an important one, which illustrates the danger of forgetting that a computer is only a tool as easily misused as any other tool, but with possibly more serious consequences because of a tendency to accept without question what the computer produces. 2 The Heads of Agreement stipulated for certain leases to be entered into upon settlement. Provisions dealing with what each lease was to provide in respect of rent, the term of the lease and outgoings were set out, and their conditions were otherwise described in the Heads of Agreement as "Normal commercial terms". Shortly after the agreement was entered into, the parties began to debate through their solicitors, Henry Davis York for the plaintiffs, and at that time, Corrs Chambers Westgarth but subsequently Phillips Fox for the defendants, the precise terms which should be included as normal commercial terms in the drawing up of the leases. One of those debated terms has given rise to the difficulty which is the subject of the present proceeding. That term has, for convenience, been described as the "Surrender on Assignment Clause". A clause dealing with assignment and subletting having been put forward on behalf of the plaintiffs, Corrs Chambers Westgarth by letter dated 21 September 2004 advised Henry Davis York that this was not acceptable. They proposed a clause 7.2.1 in the following terms: "The Lessee may only assign this lease or grant any sublease or license [sic] of the Premises if, prior to the assignment, subletting or licensing, the following condition precedents [sic] are satisfied: (a) Surrender: the Lessee first offers in writing to surrender this Lease to the Lessor. The Lessee's offer to surrender this Lease must remain open for twenty-one (21) days after its receipt by the Lessor. If the Lessor does not accept the Lessee's offer to surrender this Lease within that twenty-one (21) day period the Lessor will be deemed to have rejected the Lessee's offer;"

In a reply dated 23 September 2004 Henry Davis York stated that this clause was not agreed, adding: "The existing provisions are reasonable. Your clients' proposed clause is uncommercial and unreasonable." 3 Discussions ensued over the next two and half weeks or so and on 12 October 2004 Corrs Chambers Westgarth sent to Henry Davis York by email a revised version of the form of lease. When sending it, Corrs Chambers Westgarth advised that "[a] word version of the attached documents will be forwarded to you if required". It is thus apparent that the version actually sent was not a "word" version (it was a PDF version), a fact which had the consequence of making the manipulation of the document by amendment difficult, if not actually impossible, without complete reproduction in a different form. This had consequences that were not foreseen at the time. For the moment, it is sufficient to note that clause 7.1 (corresponding to the earlier clause 7.2.1) of the version so sent to Henry Davis York by email included neither subclause (a) nor subclauses (b) and (c) which related to it (particularly (b)). The clause, after the opening statement that the lessee "may only assign this lease or grant any sublease or license [sic] of the Premises if, prior to the assignment, subletting or licensing, the following condition precedents [sic] are satisfied", continued at subclause (d). However there was added an entirely new version of subclause (i) as follows: "Deed with Lessor (proposed assignee): the proposed assignee has entered into a covenant with the Lessor in terms reasonably required by the Lessor where the assignee agrees that: (i) it will duly perform and observe the covenants and agreements on the Lessee's part contained in this Lease; (ii) the date of assignment will be deemed to be a Market Review Date and that the rent will be reviewed to market on the date of assignment in accordance with clause 14 (including, for the avoidance of doubt, clause 14.10); (iii) it will enter into a deed of variation of lease and/or variation of lease (in registrable form) which will vary the lease to reflect the new rent." 4 On 20 October 2004 a meeting was held at the offices of Phillips Fox attended by Mr Muriti with solicitors David Ireland and Elizabeth Paine of Henry Davis York and Mr Prendergast with a solicitor Viginia Briggs of Phillips Fox. At that meeting, the form of the leases was discussed exhaustively over a period of about five hours. The draft, and the only draft, on which this discussion was based was the one that Henry Davis York had received by email from Corrs Chambers Westgarth. That draft had, I find, been personally worked on, approved and provided in the PDF form by Mr Prendergast. I am satisfied, on the evidence, that no attempt was made by anyone at the meeting to resuscitate the deleted subclause (a) or subclause (b) or (c); there was simply no mention of them. But there was discussion of the proposed new provision in subclause (i) for a market review of rent upon an assignment and this was rejected by Mr Muriti and his representatives. The copy of the draft lease taken by Mr Ireland to the meeting, heavily marked with the notes he made on it at or for the meeting, was put into evidence. There is a tick against subclause (d) and a tick against paragraph (i) of subclause (i), but there is a double question mark against paragraphs (ii) and (iii) with handwritten notes "new", "no way" and "PARKED". I take these notes as confirmatory of the conclusion that there was not agreement on the idea of a market review upon assignment and that this was one of the disagreements for which a resolution would have to be found. Mr Muriti's copy of the same version was also put into evidence, with the same paragraphs (ii) and (iii) marked "NO WAY". 5 The next step in the progress of the matter was for a version to be prepared of the form of lease, containing all of the provisions that appeared satisfactory to both sides, identifying for resolution the provisions still in dispute. Virginia Briggs of Phillips Fox, who had very recently taken over from Corrs Chambers Westgarth as solicitors for the defendants, was about to go into labour and the proposal was that Henry Davis York should prepare the required version. There was no suggestion that it was to do other than reflect what had been hammered out during the five hour meeting. But the manipulation of the draft for this purpose required a version that could be manipulated, so David Ireland sought such a version from Virginia Briggs on 21 October 2004, having earlier failed to obtain one from the defendants' former solicitors, Corrs Chambers Westgarth. Virginia Briggs sent a word version of the lease by an email which said it was "the only version of a lease which my client has". She added: "I don't think it is the version we worked from last night (and I certainly don't have any of the other leases). But it's probably better than nothing."

She also referred to the imminent possibility of her going into labour as a reason for requesting: "I'd appreciate it if you could do the next drafts." 6 Unfortunately, the significance of the cautious expression of a doubt whether the version sent was the same as that from which the parties had just been working was overlooked by Mr Ireland. He thought what he had received was a word version of the draft that had been under discussion, and he simply proceeded to make the appropriate amendments and additions. In particular, he did not notice that what he had now been sent, unlike the version discussed on 20 October 2004, did contain the previously rejected subclauses 7.1 (a), (b) and (c). It also contained the disputed market review provision, re-lettered as subclause (g). 7 What happened next was a result of Mr Ireland's misapprehension about the nature of the word version he had received from Virginia Briggs. He sent back to her by email on 25 October 2004 "5 marked up draft leases for your review and comments", adding: "The draft leases are based on the agreed provisions in the 'generic' lease, together with the varying provisions agreed in respect of each lease. The matters still not agreed are shown in bold and italics. The draft documents are being sent to everyone contemporaneously, and so have not yet been finally approved by our client. In any event, no binding agreement is intended to arise until formal lease documents have been executed."

In view of later events, it is important to observe the terms of the last sentence. 8 Because of the form of the word version utilised, and unnoticed by Mr Ireland or anyone else in the plaintiffs' camp, the draft leases included the original provision in clause 7.1 (a), (b) and (c) and thus required an offer to surrender to be made prior to any assignment. They also included the provision (which had been proposed and then pursued in the discussion on 20 October by those representing Mr Prendergast, as the evidence clearly shows, only as an alternative to the rejected and deleted surrender provision) for a market review of rent upon assignment, re-lettered as paragraph (g) and marked by the plaintiffs' solicitors to indicate that it was not agreed. 9 In a response dated 29 October 2004, Phillips Fox accepted the deletion of the market review provision while adding a qualification to one aspect of clause 7.1(c). No express reference was made by them to the fact that the provision referred to in clause 7.1(a) and (b) for surrender upon assignment, which had originally been flatly rejected by Henry Davis York and deleted from the PDF version presented by Corrs Chambers Westgarth and discussed at the meeting at the offices of Phillips Fox on 20 October, had now been included without comment in the draft Henry Davis York had sent, and the matter remained unnoticed by Henry Davis York and Mr Muriti. 10 For the purposes of proceedings before a Master (Master McLaughlin) to settle the form of each lease, an order for specific performance having been made by consent, Henry Davis York on 26 October 2004 sent to Phillips Fox a letter enclosing draft leases in the same form that had been sent with the email of 25 October 2004. Omitting formal parts, the letter stated: "We enclose, by way of service, the plaintiffs' draft leases that are to be relied upon in the preparation of our expert evidence and in the determination of this matter before the Master in Equity. In the enclosed leases, we have included in normal text the terms and conditions which we understand are agreed between the parties. Those terms which are not agreed have been marked up by the insertion of bold, italicised text and are highlighted in yellow to represent those terms of the leases which are proposed on behalf of the plaintiffs."

Clause 7 was included as it had been in the version sent by email, again without noticing that it included paragraphs (a), (b) and (c), and without any italicisation, bold lettering or colouring, because these provisions were again simply not noticed. Phillips Fox responded on 29 October 2004 with a version of each lease, containing amendments required by them, from which the market review on assignment provision had been deleted, but paragraphs (a), (b) and (c) of clause 7 were included without comment or any marking to indicate they were disputed, apart from the comparatively minor alteration to paragraph (c) previously referred to, which did not relate to the question of surrender on assignment. 11 The anticipated hearing before the Master did not take place because, in early November, the parties agreed to refer the disputed questions concerning the form of the leases to an independent expert for determination. An order removing the matter from the Master's list was made by Windeyer J on 10 November 2004 and on the same day the President of the Law Society of New South Wales was requested to appoint an independent expert to settle the leases. Pursuant to this request Ms Margaret Hole was appointed on 11 November 2004. On 15 November 2004 Henry Davis York sent a letter to Ms Hole enclosing the Heads of Agreement, the same draft leases that had been served on the defendants' solicitors on 26 October 2004 and the relevant court orders and other documents. They stated (inter alia): "In the enclosed draft leases, we have included in normal text the terms and conditions which we understood were agreed between the parties as at the date that those documents were prepared. Those terms which were not agreed are marked by the insertion of bold , italicised text and are highlighted in yellow to represent those terms of the leases which are proposed on behalf of the lessees."

Clause by clause, the document then sets out contentions in respect of the disputed provisions, but it says nothing of other terms of the drafts, and in particular nothing about the provision in clause 7 for surrender on assignment. Phillips Fox also forwarded to the expert a set of submissions (unfortunately the copy in evidence is undated) which includes the statement: "Despite their commercial negotiations, the Plaintiffs and the Defendants remain in dispute over some of the terms of the Leases and as a result, and pursuant to an order of the Court dated 10 November 2004, the parties have resolved to refer the disputed terms to an independent expert for determination."

As in the case of the submissions made by Henry Davis York, the submissions of Phillips Fox deal with disputed items and do not mention the provision for surrender on assignment, nor is it mentioned in Henry Davis York's submissions in reply. 12 Before determining the matter, Ms Hole requested the parties to execute her own form of agreement, entitled "PRESIDENT'S EXPERT AGREEMENT". The parties were the plaintiffs, the defendants and Ms Hole. Clause 2 recited as follows: "Disputes, differences or claims have arisen between the parties as to terms of 5 commercial leases and in particular: a) the terms of the Heads of Agreement and, in particular, the provision in the Schedule to the Heads of Agreement which requires the 'Lease Conditions' to be 'Normal commercial terms'; b) the terms of the draft leases prepared by the solicitors for the plaintiffs and served upon the solicitors for the defendants under cover of a letter dated 26 October 2004 which the plaintiffs assert are normal commercial terms; and c) the terms of the draft leases prepared by the solicitors for the defendants and served upon the solicitors for the plaintiffs under cover of a letter dated 29 October 2004 which the defendants assert are normal commercial terms."

Clause 3 then provides: "The parties are unable to resolved [sic] the disputes, differences or claims by agreement and have agreed to refer the disputes, differences or claims such part as remain unresolved to an Independent Expert."

Clause 6 provides (in part): "It is agreed by the parties as between each of them and as between each of them and the Independent Expert as follows: (a) that the Independent Expert shall determine the disputes, differences or claims between the parties and any Determination made by the Independent Expert shall, subject to the Act, be final and binding on the parties; … (h) that the parties agree that the Supreme Court of New South Wales shall have jurisdiction under the Commercial Arbitration Act 1984 and a reference in the Act or this agreement to the Court is, in relation to the agreement, a reference to the Supreme Court of New South Wales; (i) that the authority of the Independent Expert is irrevocable."

Finally, clause 7 provides: "This Agreement is subject to the laws of the State of New South Wales in general and the Commercial Arbitration Act 1984 in particular and the parties agree hereby to grant immunity as is given by that Act to the President's Expert, in this agreement referred to as 'Independent Expert', as if she were an arbitrator acting under that Act."

The agreement was dated 23 November 2004. 13 On 24 November 2004 Ms Hole provided by email the settled terms of the leases, but in a letter dated 25 November 2004 she pointed out that two questions remained outstanding and, in particular, the manner of appointment of an expert to obtain an environmental assessment report had yet to be addressed. She made it clear she understood this was an issue upon which the parties would be able to agree. Thus, if it matters, the full task of settling the form of the leases was not yet completed. 14 It was following the receipt of the forms of lease from Ms Hole that, for the first time, Mr Muriti and those advising him became aware of the inclusion, unintended so far as they were concerned, of the provision for assignment on surrender which had been rejected and deleted while Corrs Chambers Westgarth were acting for the defendants, and of which nothing had been said at the lengthy meeting held at the offices of Phillips Fox in an endeavour to resolve, or at least identify, the outstanding questions with regard to the form of the leases. When the plaintiffs drew attention to what had occurred, the defendants resisted any consideration of the surrender on assignment provision, claiming it had been agreed, and Ms Hole took the view it was not for her to consider now whether that was a normal commercial term. 15 Mr Prendergast, who appeared in person and by leave for the other defendants, although solicitors were acting for him and them until shortly before the hearing, did not give evidence, nor did Virginia Briggs. However, the bundle of documents prepared by Mr Prendergast's solicitors when they were acting for him and the other defendants included a version of the form of lease containing the surrender on assignment provision and the market review on assignment provision, and this version had endorsed on it in handwriting a note "delivered to J P on 12-10-04 8-20am at Alexandria by JMF". The initials "JMF" may refer to Mr John Frangi, a solicitor at Corrs Chambers Westgarth. The same bundle of documents included two letters signed by the defendant John Prendergast, both dated 12 October 2004, referring to "Prendergast and Muriti", one of which (omitting formal parts) stated: "Please find enclosed 'marked-up' versions of the draft lease and Schedule of Amendments which will form the basis of the leases for the properties in question. Also please check the document to ensure it is correct before sending it to Henry Davis York on my behalf. When you send the amended lease to Henry Davis York please let them know the following:- 1. These are all of the amendments I require. 2. I consider the lease with these amendments will contain 'normal commercial terms'."

The other letter contained three brief notes, one of which reads: "In the generic lease, clause 7.1(a) (regarding the surrender back to the Landlord) has been deleted, on the basis that on assignment, the rent will be reviewed to market (which is provided for in clause 7.1)."

Both letters were addressed to Corrs Chambers Westgarth and they are followed in the defendants' solicitors' bundle by a number of pages of a marked form of lease, clause 7.1 of which is in the form that was utilised at the meeting at Phillips Fox on 20 October 2004 as I have previously recounted, that is to say, paragraphs (a), (b) and (c) are omitted entirely and a new paragraph (i) is inserted referring to a market review of rent on assignment. Each of these pages bears Mr Prendergast's initials in his handwriting which is quite distinctive, as appears from other documents in evidence signed by him. In the absence of evidence from Mr Prendergast to the contrary, the conclusion seems clear that Mr Prendergast personally approved the deletion of the provision for surrender on assignment prior to the meeting of 20 October and that his position at that meeting, on the subject of assignment, was simply that there should be a provision imposing a market review of rent as at the date of an assignment. Such a provision, on the evidence before me, would be unusual, and the plaintiffs, of course, contended that it would not be a normal commercial term. As the email by which the PDF version to the same effect was forwarded to Mr Ireland was sent by John Frangi, solicitor of Corrs Chambers Westgarth on the same day, 12 October 2004, at 6.52pm, I infer that this was the version provided by Mr Prendergast to his solicitors and that he provided it in a PDF version. 16 In these circumstances, the plaintiffs first sought to say an agreement was concluded at or before the meeting of 20 October 2004 that the leases should not contain a surrender on assignment provision such as the defendants had previously put forward. But, in my opinion, it would be artificial in the extreme to seize upon a stage, in the ebb and flow of ideas and drafts between solicitors for opposed clients attempting to settle a mutually satisfactory document, as a moment of contract, notwithstanding that the whole process remained incomplete and the document itself was not accepted by either party. 17 The next argument for the plaintiffs is much more persuasive. They say the provision for surrender on assignment has simply been included by mistake after its deliberate deletion and it should therefore be removed from the settled form of each of the leases. It is quite clear there was a mistake, so far as the plaintiffs were concerned. But the defendants were aware the provision had been included and it is just possible, Virginia Briggs who should surely have appreciated what had occurred being away on accouchement leave, that they thought there might have been a change of mind on the plaintiffs' part. On this basis, can it be said the mistake was only a unilateral mistake of the plaintiffs not falling within the principle of Taylor v Johnson (1983) 151 CLR 422, which would allow relief to the mistaken party if the other party had deliberately set out to ensure the mistake was not discovered? The problem for the plaintiffs on that question would be the absence of evidence of any deliberate action of the kind postulated. 18 But, in my opinion, the first step in an analysis of the problem is to identify the relevant contract which could be affected by mistake. There was, I find, no contract, mistaken or otherwise, concluded at the meeting of 20 October. The parties discussed draft leases, and did not agree upon anything except a further examination of drafts which might lead (as it did) to a referral to the Master, and eventually to an expert. When Henry Davis York forwarded the mistaken draft, did they make an offer capable of acceptance so as to create a contract? In my opinion, for the same reason that led me to reject the idea of a contract to eliminate clause 7.1(a) and (b), I should hold it would be contrary to the normal understanding on which solicitors put forward drafts of documents, where the acceptance of one clause may depend upon the acceptance, rejection or amendment of another, to see Mr Ireland as offering a contract to insert clause 7.1(a) and (b) in the leases. At all events, the terms of his email of 25 October 2004 expressly negative any such notion. It follows that the draft returned to him could not be an acceptance, since there was no offer to accept. 19 Once it is seen that there was no contract to accept a particular form of lease subject only to the resolution of identified outstanding questions, the real area of contractual mistake that may be involved can be examined, and whether a unilateral or a mutual mistake was made can be considered. The one relevant contract now in question was the contract to refer the leases for expert settlement of the disputed clauses. Whether or not what was earlier arranged about that had contractual force, the final agreement, which must be taken to have subsumed or replaced prior arrangements, was the President's Expert Agreement. Clause 2 of that document makes it clear it was concerned with the disputes that had arisen as to the terms of the leases, and clause 3 states that the parties had "agreed to refer" to the expert "such part as remain[ed] unresolved" of their disputes. The submissions each side put to the expert are entirely consistent with this understanding of the contract of referral; they are confined to identified clauses in dispute, whether proposed by the plaintiffs or the defendants. 20 When the matter is looked at in that light, no room remains for regarding it as involving a merely unilateral mistake. On the assumption the defendants perceived no mistake in the plaintiffs' inclusion in their draft of the provision for surrender on assignment (and on any other assumption the plaintiffs must be entitled to relief for a not merely unconscientious but quite dishonest response to Mr Ireland's email: see Tutt v Doyle (1997) 42 NSWLR 10 at 12-13; Medsara Pty Limited v Sande [2005] NSWCA 40 at [4]), both parties mistakenly thought the marked clauses in the draft leases, to which alone they addressed their submissions, included all the clauses on which they had actually disagreed, and that all the unmarked clauses were clauses to which each was prepared to assent. It was not a case of an innocent party accepting an offer by another who was unilaterally mistaken, so as to conclude a contract. Both parties were putting forward to the expert draft documents, which would not be contractual unless and until executed, in the mistaken belief that those documents accurately revealed the area of their dispute. 21 Quite apart from the principles governing a contractual mistake, it seems to me the same result would follow here on the true construction of the President's Expert Agreement. For since only the identified disputes were by it referred to the expert for determination, and no dispute was identified in respect of the surrender on assignment clause, no dispute as to that clause was referred. The true position having become apparent before the execution of any lease, the dispute is yet to be determined, and the Court being seised of the matter pursuant to the order for specific performance, an appropriate ancillary order may be made. 22 Reference to the specific performance order raises yet another basis on which the Court may intervene. It has control of a contract which has been ordered to be specifically performed. The settlement of the form of the leases was therefore originally in the hands of the Master, but it was referred for expert determination by the authority of an order of the Court vacating the reference of that question to the Master. Indeed, it will be recalled that the defendants' solicitors, in their submissions to the expert, informed her it was "pursuant to an order of the Court" the dispute had been referred to her. As in the case of a compromise of an action by agreement of the parties, the matter remains under the control of the Court pursuant to the order under which the Heads of Agreement, including the provision for the execution of the leases, will be performed. That situation makes applicable to the President's Expert Agreement the principle cited by Barrett J in Mohamed v Farah [2004] NSWSC 482. Although it was sufficient for the purposes of that case for his Honour to see the principle as applicable to a compromise, its foundation rests on the Court's control of litigation in order to serve the interests of justice. In this case no less than in that, I hold that the interests of justice in the circumstances require a determination to be made now, as it has not been made yet, of the question which was obscured by the mistake that has occurred. 23 I propose to make an order under Part 72 Rule 2 of the Supreme Court Rules and the transitional provisions of the Civil Procedure Act 2005 referring to Ms Margaret Hole for inquiry and report the question whether each of the leases should contain either of the provisions referred to as the surrender on assignment provision and the market review on assignment provision. It is desirable to utilise the transitional provisions because other questions with respect to the leases are already under consideration by Ms Hole pursuant to the same provisions. If, of course, the defendants choose now to revert to Mr Prendergast's previous decision to opt for one only of the suggested clauses, it will be unnecessary for the inquiry and report to deal with the other, but in the unusual circumstances I have concluded Mr Prendergast should have the opportunity to reconsider that question at this stage. 24 As to costs, the position is somewhat complicated. The order to be made should provide for the plaintiffs to pay any costs of the defendants thrown away by reason of the mistaken inclusion of the surrender on assignment provision in the drafts of the leases from 25 October 2004 until the defendants were advised of the mistake. Those costs should also include the costs of the fresh referral to Ms Hole I am now making which would have been unnecessary but for the error of the plaintiffs' solicitors. However, the defendants should pay the plaintiffs' costs of the motion which the defendants have unsuccessfully resisted. 25 I direct that the plaintiffs bring in, at a time to be fixed, short minutes of orders appropriate to reflect these reasons.

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